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T.Doc.104-32 TAXATION PROTOCOL AMENDING CONVENTION WITH INDONESIA ...


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104th Congress                                              Treaty Doc.
                                 SENATE

 2d Session                                                      104-31
_______________________________________________________________________



 
                   TAXATION CONVENTION WITH AUSTRIA

                               __________

                                MESSAGE

                                  from

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

  CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF 
  AUSTRIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF 
FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT VIENNA ON MAY 
                               31, 1996.

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 September 4, 1996.--Convention was read the first time and, together 
  with the accompanying papers, referred to the Committee on Foreign 
     Relations and ordered to be printed for the use of the Senate.


                         LETTER OF TRANSMITTAL

                              ----------                              

                                The White House, September 4, 1996.
To the Senate of the United States:
    I transmit herewith for Senate advice and consent to 
ratification the Convention Between the United States of 
America and the Republic of Austria for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income, signed at Vienna May 31, 1996. Enclosed is an 
exchange of notes with an attached Memorandum of Understanding, 
which provides clarification with respect to the application of 
the Convention in specified cases. Also transmitted for the 
information of the Senate is the report of the Department of 
State with respect to the Convention.
    This Convention, which is similar to tax treaties between 
the United States and other OECD nations, provides maximum 
rates of tax to be applied to various types of income and 
protection from double taxation of income. The Convention also 
provides for exchange of information to prevent fiscal evasion 
and sets forth standard rules to limit the benefits of the 
Convention to persons that are not engaged in treaty shopping.
    I recommend that the Senate give early and favorable 
consideration to this Convention and give its advice and 
consent to ratification.

                                                William J. Clinton.


                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                       Washington, August 30, 1996.
The President,
The White House.
    The President: I have the honor to submit to you, with a 
view to its transmission to the Senate for advice and consent 
to ratification, the Convention Between the United States of 
America and the Republic of Austria for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income, signed at Vienna on May 31, 1996 (``the 
Convention''). Also enclosed for the information of the Senate 
is an exchange of notes with an attached Memorandum of 
Understanding, which provides clarification with respect to the 
application of the Convention in specified cases.
    This Convention will replace the existing Convention 
Between the United States of America and the Republic of 
Austria for the Avoidance of Double Taxation with Respect to 
Taxes on Income signed on October 25, 1956. The new Convention 
maintains many provisions of the existing convention, but it 
also provides certain additional benefits and updates the text 
to reflect current tax treaty policies.
    This Convention is similar to the tax treaties between the 
United States and other OECD nations. It provides maximum rates 
of tax to be applied to various types of income, protection 
from double taxation of income, exchange of information to 
prevent fiscal evasion, and standard rules to limit the 
benefits of the Convention to persons that are not engaged in 
treaty-shopping. Like other U.S. tax conventions, this 
Convention provides rules specifying when income that arises in 
one of the countries and is derived by residents of the other 
country may be taxed by the country in which the income arises 
(the ``source'' country).
    The Convention establishes maximum rates of tax that may be 
imposed by the source country on specified categories of 
income, including dividends, interest, and royalties, to 
residents of the other country. The withholding rates on 
investment income are generally the same as in the present 
U.S.-Austrian treaty. Dividends from direct investments 
(holdings by a corporation of at least ten percent of the 
equity of a firm) are subject to tax by the source country at a 
rate of five percent. All other dividends are taxable at 15 
percent. These rates are the same as in many recent U.S. 
treaties with OECD countries. In general, interest derived and 
beneficially owned by a resident of a Contracting State is 
taxable only in that State.
    Royalties derived and beneficially owned by a resident of a 
Contracting State are generally taxable only in that State. 
However, royalties constituting consideration for the use of, 
or right to use, cinematographic films, or films, tapes, or 
other means of reproduction used for radio or television 
broadcasting may also be taxed in the Contracting State in 
which they arise, but the tax so charged may not exceed ten 
percent of the gross amount of the royalties. These tax 
withholdings do not apply, however, if the beneficial owner of 
the income is a resident of one Contracting State who carries 
on business in the other Contracting State in which the income 
arises. In that situation, the income is to be considered 
either business profit or income from independent personal 
services.
    The taxation of capital gains under the Convention is a 
variation on the rule in the treaty currently in force with 
Austria and most recent U.S. tax treaties. In most other U.S. 
income tax treaties, gains from the sale of personal property 
are taxed only in the seller's State of residence unless they 
are attributable to a permanent establishment or fixed base in 
the other State. Under the proposed Convention, the other State 
may also tax gains from the sale of personal property that is 
removed from a permanent establishment or fixed base, to the 
extent that the gains accrued while the asset formed part of a 
permanent establishment or fixed base. Double taxation is 
prevented because the residence State must exclude from its tax 
base any gain taxed in the other State.
    The proposed Convention generally follows the standard 
rules for taxation by one country of the business profits of a 
resident of the other. The non-residence country's right to tax 
such profits is limited to cases in which the profits are 
attributable to a permanent establishment located in that 
country.
    As do all recent U.S. treaties, this Convention preserves 
the right of the United States to impose its branch profits tax 
in addition to the basic corporate tax on a branch's business. 
This tax is not imposed under the present treaty. The proposed 
Convention also accommodates a provision of the 1986 Tax Reform 
Act that attributes to a permanent establishment income that is 
earned during the life of the permanent establishment but is 
deferred and not received until after the permanent 
establishment no longer exists.
    Consistent with U.S. treaty policy, the proposed Convention 
permits only the country of residence to tax profits from 
international carriage by ships or airplanes and income from 
the use or rental of ships, aircraft, or containers. Under the 
present treaty, such rental income is treated as royalty 
income, which may be taxed by the source country if the 
enterprise that earns the income has a permanent establishment 
in that country.
    The taxation of income from the performance of personal 
services under the proposed Convention is essentially the same 
as that under other recent U.S. treaties with OECD countries. 
Unlike many U.S. treaties, however, the proposed Convention 
provides for the deductibility of cross-border contributions by 
temporary residents of one State to pension plans registered in 
the other State under limited circumstances.
    Like other U.S. tax treaties and agreements, this 
Convention provides the standard anti-abuse rules for certain 
classes of investment income. In addition, the proposed 
Convention provides for the elimination of another potential 
abuse relating to the granting of U.S. treaty benefits in the 
so-called ``triangular cases,'' to third-country permanent 
establishments of Austrian corporations that are exempt from 
tax in Austria by operation of Austrian law. Under the proposed 
rule, full U.S. treaty benefits will be granted in these 
``triangular cases'' only when the U.S.-source income is 
subject to a significant level of tax in Austria and in the 
country in which the permanent establishment is located. This 
anti-abuse rule does not apply in certain circumstances, 
including situations in which the United States taxes the 
profits of the Austrian enterprise under subpart F of the 
Internal Revenue Code.
    The proposed Convention contains standard rules making its 
benefits unavailable to persons engaged in treaty-shopping. The 
current treaty contains no such anti-treaty-shopping rules. The 
proposed Convention also contains the standard rules necessary 
for administering the Convention, including rules for the 
resolution of disputes under the Convention and for exchange of 
information. The proposed Convention significantly expands the 
scope of the exchange of information between the United States 
and Austria. For example, U.S. tax authorities will be given 
access to Austrian bank information in connection with any 
``penal investigation.''
    The Convention authorizes the General Accounting Office and 
the Tax-Writing Committees of Congress to obtain access to 
certain tax information exchanged under the Convention for use 
in their oversight of the administration of U.S. tax laws and 
treaties.
    This Convention is subject to ratification. It will enter 
into force on the first day of the second month following the 
exchange of instruments of ratification and will have effect 
with respect to taxes withheld by the source country for 
payments made or credited on or after the first day of the 
second month following entry into force and in other cases for 
taxable years beginning on or after the first day of January 
following the date on which the Convention enters into force. 
When the present convention affords a more favorable result for 
a taxpayer than the proposed Convention, the taxpayer may elect 
to continue to apply the provisions of the present convention, 
in its entirety, for one additional year.
    This Convention will remain in force indefinitely unless 
terminated by one of the Contracting States. Either State may 
terminate the Convention after five years from its entry into 
force by giving at least six months of prior notice through 
diplomatic channels.
    An exchange of notes with an attached Memorandum of 
Understanding accompanies the Convention and provides 
clarification with respect to the application of the Convention 
in specified cases. For example, the Memorandum specifies that 
the term ``penal investigation,'' in connection with which U.S. 
tax authorities will be given access to Austrian bank 
information, applies to proceedings carried out by either 
judicial or administrative bodies. Of particular importance in 
expanding the exchange of tax information with Austria is the 
provision in the Memorandum that commencement of a criminal 
investigation by the Criminal Investigation Division of the 
Internal Revenue Service constitutes a ``penal investigation.''
    A technical memorandum explaining in detail the provisions 
of the Convention will be prepared by the Department of the 
Treasury and will be submitted separately to the Senate 
Committee on Foreign Relations.
    The Department of the Treasury and the Department of State 
cooperated in the negotiation of the Convention. It has the 
full approval of both Departments.
    Respectfully submitted,
                                                     Lynn E. Davis.

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